Big swing in Indon oil fortunes

  • Letters
  • Sunday, 15 Aug 2004

By Karim Raslan

A COMBINATION of spiralling global oil prices and domestic fuel subsidies are beginning to force Indonesian policymakers to address deep-rooted problems in the country’s corruption-riddled oil and gas industry – still the largest in South-East Asia. 

As the reforms take root, the opportunities for Malaysian entrepreneurs in oil and gas exploration, storage, distribution and services will be staggering. 

Only last week Kompas, the leading national daily, wrote extensively and positively about Malaysia’s Petronas. It posed the oft-asked question: could the Indonesian state-owned oil giant, Pertamina, be overhauled in order to surpass its counterpart’s achievements? 

Certainly, dramatic changes are afoot, as President Megawati Sukarnoputri’s Cabinet endeavours to stem a succession of damaging corruption scandals. 

ECONOMIC LIFELINE: Pertamina workers lining up their tankers near an oil storage depot in north Jakarta. Indonesia needs to harness other natural resources in order to diversify the country’s undue dependence on oil.— AFPpic

Last week, most of Pertamina’s management was ousted following the media’s exposure of vested interests in the sale of two crude oil tankers built for the company. 

The re-assessment of Pertamina comes as Indonesia (a long-term Opec member) was transformed into a net oil importer earlier in the year. For the first time, the republic’s imports – averaging some 484,000 barrels of crude oil a day – surpassed its exports by a margin of over 36,000 barrels a day. 

Indeed, Indonesia’s production has been in decline for the past three years, dropping from an average of just over 1.2 million barrels a day to about 1.1 million now – well below its Opec quota of 1.27 million. 

The reversal in Indonesia’s petroleum fortunes and the record US$45 (RM171) per barrel price level is also causing considerable anxiety in government circles because of the country’s long-maintained and politically sensitive fuel subsidies. 

Back in 2003, government economists estimated that oil prices would remain around US$22 (RM84) per barrel, at which level the subsidies would have cost the Indonesian treasury some 14.5tril rupiah (RM4bil). 

However, at the present unprecedented price levels, the republic faces a severe budgetary crisis. Private economists have estimated that Indonesia will need to spend up to 46tril rupiah (RM13bil) on the subsidies before the end of the year – three times the budgeted amount. 

The developments have severe ramifications for Indonesia and the winner of its presidential run-off on Sept 20. One of the two leading contenders – Megawati and Susilo Bambang Yudhoyono – will be forced to address the fiscal shortfall almost immediately after taking office in October.  

Both candidates are well aware how dangerous the issue can be for the government, given that petrol, diesel and kerosene (widely used by poorer Indonesians as cooking fuel) are all heavily subsidised. 

Moreover, when former strongman Suharto was forced by the International Monetary Fund in 1998 to lift the vital fuel subsidies, the ensuing street protests quickly led to his fall from power. 

Indonesian policymakers will have to undertake a series of key steps to boost production and strengthen the country’s finances. 

Some of these changes will benefit foreign investors and Malaysians in particular, who are increasingly looking towards Indonesia. Petronas has been expanding into the republic for a number of years; its most recent deals involving the development of natural gas. 

First, the government will have to address on-going foreign investor concerns over legal, political and contractual uncertainties in order to attract more players into the industry. These are nationwide issues, also applicable to the manufacturing and agricultural sectors. An improvement in these areas would send a strong signal to potential investors. 

A dearth of inward investment has meant that proven crude oil reserves have languished at the same levels for over 10 years. Boosting exploration and production will result in a definite improvement. 

Indonesia must also come to terms with the cost of its fuel subsidies.  

Political realities will prevail, as Susilo explained recently in Kuala Lumpur: “Prices will only be allowed to rise gradually in order to minimise socio-economic dislocation and inflation. We must also look at the needs of the poorest members of society.” 

Still, the incoming administration must commit itself to a policy of price harmonisation. Such distortions serve to foster long-term and structural inefficiencies in the marketplace. Consumers must learn to adapt to the actual cost of the fuel they are consuming. 

In addition, the archipelago is rich in alternative energy resources, ranging from natural gas and coal to hydroelectric power. These sources should be harnessed in order to diversify the country’s undue dependence on oil. 

There are already mounting calls for Indonesia, the world’s largest producer of natural gas, to use this resource domestically rather than export it.  

Of course, reforms of Pertamina must continue. For example, Indonesia’s state oil giant needs more competition in the soon-to-be deregulated downstream sector. The opportunities are vast: it is estimated that Indonesia will have over 18 million cars by 2020 requiring 9,000 petrol stations – up from 3.4 million and 2,500 now respectively. 

Finally, with the exception of a number of fields in East Java, most of Indonesia’s oil resources are located outside the heavily populated core of the nation. This geographical spread has meant that foreign investors are forced to deal with many regional and provincial power elites. 

In turn, this has created a tension between the centre and the periphery, as well as countless opportunities for the unscrupulous gouging of foreign investors. 

The new president must address the structure of regional autonomy and figure out a more realistic and pragmatic way of sharing the benefits of natural resource development. 


  • Karim Raslan is a regionally-syndicated columnist 

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